On 27 Nov 2025, the HKMA issued the latest version of SPM module CA-G-5 'Supervisory Review Process', superseding previous versions dating back to 2006. The document establishes the HKMA's approach to the Supervisory Review Process under Pillar 2, differentiating between P2A (capital add-on) and P2B (cushion of capital) components of the Pillar 2 capital requirement. It provides detailed guidance on determining the §97F minimum CAR, the supervisory standards for the Capital Adequacy Assessment Process (CAAP), and the assessment framework for evaluating institutions' capital adequacy. The document will take effect on 1 January 2026.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
Opening Bank Accounts: Duties of Banks in Hong Kong to Combat Tax Evasion
Hong Kong money laundering laws require banks to assess the risk of tax evasion in evaluating bank account opening applications. Prospective customers applying
Opening a Bank Account in Hong Kong: Latest Regulatory Developments
For many new businesses, opening a bank account is a mission critical task. Unfortunately, as a result of significant growth in laws intended to combat money l
SPOTLIGHT ON
FAMILY OFFICES
Introduction and Purpose
On 27 Nov 2025, the Hong Kong Monetary Authority (HKMA) issued the latest version (V.7) of Supervisory Policy Manual (SPM) module CA-G-5 'Supervisory Review Process', superseding previous versions dating back to 2006. This statutory guideline under Section 7(3) of the Banking Ordinance sets out the HKMA's approach to conducting the Supervisory Review Process (SRP) under Pillar 2 of the capital adequacy framework, including the criteria and standards for evaluating an institution's capital adequacy and determining its Pillar 2 capital requirement.
Key Components of the Supervisory Review Process
The document details the HKMA's approach to supervisory review, emphasizing the assessment of an institution's overall risk profile, capital adequacy, and the effectiveness of its Capital Adequacy Assessment Process (CAAP). The SRP consists of key components including review of the institution's risk profile, review of its CAAP, determination of the institution's §97F minimum CAR and buffer level, communication of SRP results, and ongoing monitoring of capital adequacy. The HKMA will apply a proportionate approach to institutions of varying size and complexity, with the frequency, intensity, and depth of the SRP determined by the potential risk the institution poses to supervisory objectives.
Pillar 2 Capital Requirement: P2A and P2B
The document establishes a clear differentiation between the P2A and P2B components of the Pillar 2 capital requirement. P2A reflects risks not captured or not adequately captured under Pillar 1 and constitutes a constituent part of the §97F minimum CAR. P2B provides a cushion of capital to bolster resilience during stress periods without reference to specific risks and determines whether the BCR buffer level needs to be increased. The document provides detailed guidance on how these components interact with the BCR buffer level, emphasizing that any overlap between P2B and the BCR buffer level will not be double-counted.
Determination of §97F Minimum CAR
The document outlines the apportionment method for determining the §97F minimum CAR, where only the P2A component of the Pillar 2 capital requirement is allocated to the three minimum capital ratios (CET1, Tier 1, and Total capital ratios) on a 4.5/6/8 split. The P2B component is used to determine whether the BCR buffer level needs to be increased. The HKMA will determine the Pillar 2 capital requirement based on the institution's overall risk profile, with indicative levels falling within specific bands depending on assessment results, though the HKMA retains the right to impose higher requirements where justified by SRP results.
Supervisory Standards on CAAP
The document sets out detailed supervisory standards for the Capital Adequacy Assessment Process (CAAP), requiring institutions to have a comprehensive CAAP for assessing their overall capital adequacy in relation to their risk profile. The CAAP should be integrated with capital planning processes, risk management, and governance frameworks. The HKMA will assess the reasonableness of the CAAP outcome, with particular focus on the soundness of the process, management involvement, use of the CAAP in decision-making, and whether the institution has provided for unexpected events in setting capital levels. The document also provides specific guidance on stress testing requirements and the assessment of risks arising from securitization activities, counterparty credit risk, and risk concentrations.
View the full article:Source
